The Rise of Behavioral Economics and Its Influence on Organizations

Executive Summary

Richard Thaler, the University of Chicago professor who just won the Nobel Memorial Prize in Economic Sciences, inspired scholars across different disciplines and fundamentally changed the way we think about human behavior. He is considered the father of behavioral economics — a new field that combines insights from psychology, judgment and decision making, and economics to generate a more accurate understanding of human behavior. Among his many achievements, Thaler inspired the creation of behavioral science teams, often call “nudge units,” in public and private organizations around the globe. Together with Cass Sunstein, he wrote a book in 2008 called Nudge: Improving Decisions about Health, Wealth, and Happiness, which suggests that there are many opportunities to “nudge” people’s behavior by making subtle changes to the context in which they make decisions. Nudges can solve all sorts of problems governments and businesses alike consider important.

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Richard Thaler, the University of Chicago professor who just won the Nobel Memorial Prize in Economic Sciences, has inspired scholars across different disciplines and fundamentally changed the way we think about human behavior. He is considered the father of behavioral economics — a relatively new field that combines insights from psychology, judgment, and decision making, and economics to generate a more accurate understanding of human behavior.

Economics has long differed from other disciplines in its belief that most if not all human behavior can be easily explained by relying on the assumption that our preferences are well-defined and stable across time and are rational. Back in the 1990s, Thaler began challenging that view by writing about anomalies in people’s behavior that could not be explained by standard economic theory. For instance, in 1991, he started a column in the The Journal of Economic Perspectives with two other colleagues that was all about such anomalies.

Among his many achievements, Thaler inspired the creation of behavioral science teams, often call “nudge units,” in public and private organizations around the globe. Together with Cass Sunstein, he wrote a book in 2008 called Nudge: Improving Decisions about Health, Wealth, and Happiness, which suggests that there are many opportunities to “nudge” people’s behavior by making subtle changes to the context in which they make decisions — a topic I’ve also explored.

Nudges can solve all sorts of problems governments and businesses alike consider important. Here are some examples.

A few years ago, for instance, General Electric’s leaders wanted to address the issue of smoking, believing that it impacted its employees negatively. So, in collaboration with Kevin Volpp and his co-authors, they conducted a randomized controlled trial (think: field experiment). Employees in the treatment group each received $250 if they stopped for six months and $400 if they stopped for 12 months. Those in the control group did not receive any incentive. The researchers found that the treatment group had three times the success rate of the control, and that the effect persisted even after the incentives were discontinued after 12 months. Based on this work, GE changed its policy and started using this approach for its then-152,000 employees.

Policies that may affect how much we eat is another behavior that policy makers and companies that want to encourage healthy lifestyles (e.g., Google and Facebook) consider important. McDonald’s has an old policy of asking whether customers want to super-size their order. As it turns out, they often do. But research by Janet Schwartz and colleagues finds that when customers in a Chinese restaurant are asked if they want to down-size their portions of side dishes, they often do. The percentage of customers who did so in their field experiments, 14% to 33% of them, ate 200 less calories on average.

In research that Thaler himself conducted, defaults were used to increase employees’ savings rates by automatically increasing the percentage of their wage devoted to saving. This is a program called “Save More Tomorrow” (SMarT). SMarT program participants increased their saving rates from 3.5% to 13.6% over the course of 40 months, on average, while savings rates remained stagnant for those who did not participate in the program.

Nudges are also helpful to reduce dishonesty. My colleagues and I conducted a field experiment in collaboration with an insurance company. We asked customers to sign at the top of a form or at the end as they usually do when reporting how many miles they had driven their car the previous year for insurance purposes. By moving the signature to the top, we primed them to act honestly. People more honestly declared their mileage instead of deflating the number in order to lower their premiums like they did when they signed at the bottom of the form.

All of this is not to say behavioral economics is simple for companies to apply. There are plenty of ways to use it in the wrong ways and we’ve seen recent examples of this from organizations like Uber.

Smoking, savings, honesty, and healthy eating may not be items on your list of problems to address or areas where you’d like to see improvements in your own behavior or the actions of people you manage or lead. But no matter what concerns you, adopting a nudge, as Thaler and the many scholars who followed his approach to research tell us, may lead to a powerful change for the better. It just requires an acknowledgment that human behavior is full of anomalies.